State Farm Insurance License Practice Exam

What does the principle of estoppel entail?

1. A party may be prohibited from denying a fact that caused reliance

2. An enforceable contract must be written

3. All parties must agree to changes in coverage

4. A policy cannot be amended once issued

The correct answer is: A party may be prohibited from denying a fact that caused reliance

The principle of estoppel is centered around preventing a party from denying a fact or a right when another party has relied on that fact to their detriment. In the context of insurance, if an insurer or an agent makes representations or gives assurances that induce a policyholder to rely on those assurances, the insurer cannot later deny those assertions if it would unfairly harm the policyholder. This principle is designed to uphold fairness and prevent unjust behavior. For instance, if an insurance agent verbally confirms that a certain coverage is included in a policy and the policyholder relies on this assurance when making decisions, the insurer may be estopped from later claiming that the coverage was not part of the policy. The other options focus on aspects of contracts and agreements rather than on the reliance aspect that estoppel addresses. While enforceable contracts, changes in coverage, and amendments to policies are important concepts in insurance, they do not encapsulate the essence of the principle of estoppel, which is fundamentally about preventing one party from going back on their word when it has created expectations for another party.